Topic 3 - The Wall Street Crash Flashcards
Identify three causes of the Wall Street Crash (October 1929).
- Speculation
- Overproduction
- Lack of an export market
What was speculation?
The practice of buying shares with the confidence that they can be sold for a profit once prices have risen.
What did it mean to “buy on the margin”?
Shareholders borrowed up to 90% of the share price from the bank.
How much did American banks lend for speculating in 1929?
$9 billion
What impact did speculation have on share prices?
More and more people bought shares, which caused share prices to rise artificially high (above the value of the business).
What belief drove speculation and the buying of shares in the 1920s?
The confidence that share prices would continue to rise.
Why did shareholders begin to sell shares at rapid rates in October 1929?
They lost confidence in the American economy and did not believe they would continue to make money on shares.
Why did speculation cause the Wall Street Crash?
Speculation drove prices to an artificially high level →
Shareholders realised that their shares were worth more than the value of the business they had invested in →
Shareholders lost confidence in the value of their shares and began selling their shares as fast as possible →
Share prices fell dramatically and people sold shares at a fraction of what they had bought them for →
Many were unable to pay back their loans, which caused businesses, banks and investors to become bankrupt.
What is overproduction?
Producing more goods than is wanted or needed (exceeding demand)
What had happened to production levels in the late-1920s?
American industries were producing too many goods and there was not enough demand from the American people to sell the goods.
How many cars were produced in 1929, and why was this problematic?
4.5 million cars were produced, even though one fifth of Americans already owned a car.
What proportion of American people lived below the poverty line and could not afford consumer goods?
60%
Why was demand for consumer goods low by the late-1920s? (Identify two reasons)
- Many Americans had already bought the consumer goods they wanted.
- Many Americans were living in poverty and could not afford consumer goods.
Why did overproduction cause the Wall Street Crash?
Fall in demand for American goods →
Lower prices and lower profits for companies →
Shareholders lost confidence in the value of their shares and began selling their shares as fast as possible →
Share prices fell dramatically and people sold shares at a fraction of what they had bought them for →
Many were unable to pay back their loans, which caused businesses, banks and investors to become bankrupt.
What is a tariff?
A tax on imported goods, which makes them more expensive.
Why did other countries place tariffs on American goods in the 1920s?
They retaliated against the high tariffs that Republican governments had placed on foreign imports in the 1920s (e.g. 1922 Fordney-McCumber Tariff Act), which had made the demand for foreign goods drop as they were more expensive.
What was the consequence of the tariffs placed on American goods?
American goods became more expensive abroad, which caused a drop in demand for American goods abroad. This worsened the problem of overproduction.
Why did the lack of an export market cause the Wall Street Crash?
This worsened the problem of overproduction and limited the growth of the US economy →
Shareholders lost confidence in the value of their shares and began selling their shares as fast as possible →
Share prices fell dramatically and people sold shares at a fraction of what they had bought them for →
Many were unable to pay back their loans, which caused businesses, banks and investors to become bankrupt.
Describe the events of the Wall Street Crash (October 1929).
October 13-17, 1929: The stock market began to grow unstable – investors began to sell shares, causing prices dropping sharply.
October 24, 1929 (“Black Thursday”): Panic selling continued. However, the biggest banks started to buy shares to stabilise the stock market, causing share prices to recover.
October 28, 1929: Share prices again fell sharply. Banks did not step in to support the stock market.
October 29, 1929: Over 16 million shares were sold in a day, causing prices to plummet. $10,000 million was lost by investors in a single day’s trading, leaving thousands bankrupted (e.g. investors; banks who had loaned money).
How many shares were sold on October 29, 1929?
16 million shares
How much money was lost in shares on October 29, 1929?
$10,000 million
